Thinking | 5 July 2010

New Regulations enacted for Simplified PDSs

Corporations Regulations 2001 (Cth) (Regulations) were amended on 15 June 2010 to establish a simplified product disclosure statements (Simplified PDS) regime for simple managed investment schemes, superannuation and margin lending products.

The new Simplified PDS regime will apply from 1 January 2011 for margin lending products and from 22 June 2011 for simple managed investment schemes and superannuation products.

Amendments to the Regulations contained in the Corporations Amendment Regulations 2010 (No.5)(Amending Regulations) are intended to promote the objective of having “clear, concise and effective” PDSs. The Amending Regulations have been enacted following extensive consultation with the public, the financial services industry and consumer representatives.

The key features of the Amending Regulations are:

  • issuers of simple managed investment schemes, superannuation and margin loan products are required to prepare Simplified PDSs with prescribed length, format and minimum content requirements. The Simplified PDS requirements are mandatory and regulated issuers cannot choose to instead rely on the standard PDS regime set out in Part 7.9 of the Corporations Act 2001 (Cth) (Corporations Act) unless specific relief is obtained from the Australian Securities and Investments Commission (ASIC) (see section below ‘What are the format and content requirements for Simplified PDSs’)
  • provisions relating to Simplified PDSs for margin loans will apply from 1 January 2011 onwards, coinciding with the date when margin loans become regulated under the Corporations Act.  For simple managed investment schemes and superannuation products, the simplified PDS regime will be phased in over a 24 month period (see section below ‘When must product issuers comply’)
  • in the preparation of the short form PDS, issuers may incorporate external information located outside the PDS by reference (see section below ‘Incorporation by reference’)
  • material that relates to the financial product that is outside the PDS, and is ‘otherwise referred to’ in the PDS without being formally incorporated into the PDS, is subject to the misleading and deceptive conduct provisions of the Corporations Act and ASIC Act
  • and other miscellaneous provisions relating to the retention of PDSs and obligations to give copies of the PDS to investors free of charge.

Which financial products are required to have Simplified PDSs?

Generally, the Amending Regulations require issuers of simple managed investment schemes, superannuation and margin loan products to prepare Simplified PDSs in relation to those products. Simple managed investments schemes are registered managed investment schemes which invest at least 80% of their assets in either:

  • money in a bank account or with a bank which is available for withdrawal at call or at the end of a fixed-term period not exceeding three months or
  • arrangements by which the responsible entity can reasonably expect to realise the investment, at market value, within 10 days (Regulation r 1.0.02(1)).

For example, simple managed investment schemes are likely to include registered schemes investing in listed assets, but not include direct property schemes (because the responsible entity would not have a reasonable expectation that it could realise the scheme’s assets within 10 days).

A number of simple managed investment schemes and superannuation products have been excluded from the Simplified PDS regime. These include:

  • quoted simplified managed investment scheme product or products intended to be quoted on a prescribed financial market (Regulation r 7.9.11S(2))
  • stapled securities (Regulation r 7.9.11S(3)) and
  • superannuation interests that are solely interests in a defined benefits fund, and pension products (Regulation r 7.9.11K(2))

When must product issuers comply?

The time frames for compliance with the Simplified PDS regime are set out in the table below.

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What are the format and content requirements for Simplified PDSs?

Broadly, the format and content requirements for Simplified PDSs for superannuation products and simple managed investment schemes are:

  • limitations on the length and font size of the Simplified PDS (eg if printed on A4 paper the PDS must not exceed eight pages in length and font size for text other than those used for names, ABN and addresses must be no less than nine point)
  • the Simplified PDSs must meet minimum content requirements, and must contain sections where the following information is disclosed:
    • the name of the product and details of the issuer
    • how the product works
    • the benefits of investing in the product
    • the risks of investing in the product. In particular, the Simplified PDS must include prescribed disclosures about the risks of investing in products with variable returns
    • how the issuer invests the client’s money. This section must include, amongst other things, information about investment options, particularly default options, switching of investments and prescribed warnings about the need for an investor to consider his or her personal circumstances
    • fees and costs.  Amongst other things, the fees and costs section must contain a costs template and worked examples of how fees and costs are calculated. The cost template will be more simplified compared to the standard cost template required under the current Regulations
    • how the product is taxed
    • how to open an account. This section must contain, amongst other things, information about cooling off rights and dispute resolution requirements
    • and in respect of superannuation products only, information about whether or not the superannuation product offers insurance (see Schedules 10D and 10E of the Regulations).
There are also format and content requirements prescribed for Simplified PDSs for margin loan products in Schedule 10C of the Regulations.

Incorporation by reference

The Amending Regulations also provide that certain information may be incorporated by reference in the Simplified PDS.  Generally, in order for information to be incorporated by reference:

  • the information located outside the PDS that is being incorporated into the PDS must be in writing, clearly distinguishable from other unincorporated information and be publicly available
  • the Simplified PDS must clearly identify the information which is to be incorporated by reference (including the correct version of the information)
  • the issuer of the PDS must ensure that a person relying on the PDS will reasonably have easy and quick access to the information that is being incorporated and
  • the issuer must include prescribed statements in the Simplified PDS stating that the incorporated information forms a part of the PDS (see Regulations r7.6.11E, 7.9.11P and 7.9.11X).

Where information is incorporated by reference in the Simplified PDS, the PDS content and liability requirements in Part 7.9 of the Corporations Act will apply to the information.

Overview of key issues

  • The overriding concern with the Simplified PDS regime (which was expressed in the consultation phase by many of those who made submissions) is the ability for issuers of relatively complex products (even if they are considered to be ‘simple’ products by Treasury) to fit all the prescribed content into an eight page PDS, in a manner that is ‘clear, concise and effective’, but which also discloses all the information that a retail investor would expect to be disclosed in relation to the product.
  • The Simplified PDS regime will certainly encourage issuers to ‘incorporate by reference’, particularly generic information that often doesn’t change from one PDS to another such as information about privacy, cooling-off, rates of tax, etc, as issuers simply will not be able to comply with both the minimum content requirement in the prescribed format if they do not incorporate such information by reference.
  • A question raised by industry, which will probably only be resolved once a body of practice has developed using the Simplified PDS, is the extent to which consumers are likely to be more confused by having to jump between the Simplified PDS and the issuer’s website (to refer to information incorporated by reference) than they would have been had all the information been contained in the PDS.
  • The Simplified PDS regime separates the marketing function of a PDS from its primary legal function as a disclosure document, so the “marketing” material that would ordinarily be included in a PDS – about the issuer, the product and the relevant market segment – will now be likely to sit outside the PDS (most likely as information that is ‘otherwise referred to’ in the PDS, but which is not incorporated by reference to form part of the PDS).
  • Issuers will need to ensure that they continue to approach the preparation and disclosure of this material with the rigour that they do now where such material is included in the PDS, as this information is likely to be scrutinised closely to ensure it is not misleading consumers, notwithstanding that it no longer forms part of the PDS and is therefore not subject to the PDS liability provisions.
  • The draft Regulations, when released by Treasury in December 2009 for comment, were accompanied by an example PDS.  What is the status of that example PDS now that the Regulations have been issued with no reference to it?
  • There was some suggestion when the Financial Services Working Group first started preparation of an example PDS that, once released, issuers that used the form of the example PDS would get some comfort from doing so (perhaps through the Regulations deeming that use of the example PDS would satisfy the ‘clear, concise and effective’ requirement).
  • However, the example PDS hasn’t been incorporated into the Regulations, and there has been no comment from Treasury as to whether it can be used by issuers as a template, or a guide, or whether it is not to be relied on at all.  It will not give issuers a lot of confidence that Treasury itself does not appear to have settled on a form of Simplified PDS that complies with the law.
  • For superannuation product issuers, the disclosure around insurance tends to be a significant part of the PDS.  Certain components of disclosure around insurance (such as tables of rates) lend themselves to incorporation by reference, but for funds with a number of sub-plans with different employer-sponsors that each have their own insurance arrangements, ensuring that the right information is incorporated into the Simplified PDS will be difficult to monitor.

Conclusion

A Simplified PDS regime for simple managed investment scheme products may be welcomed by many as an innovation in the quest for PDSs that will be read by and meaningful to investors.  As always, the challenge for PDS issuers is the inclusion of all information that is necessary for the issuer to comply with its legal requirements, which includes, amongst other things, the signficant features, benefits and risks of the product. The general PDS requirements to include any information that might reasonably be expected to have a material influence on the decision of a retail investor to acquire the product does not apply to products covered by the Amending Regulations but will the threshold really change in practice (and will this lead to reduced dislcosure)?

Clearly, issuers will be forced to incorporate by reference to facilitate complete disclosure although this has been resisted in the past in relation to the current PDS regime.  The inclusion of information in more than one place will also impose additional compliance obligations to ensure that the integrity of information is maintained.

The concept of a Simplified PDS contained in around eight pages is commendable in theory but one wonders whether in practice it is adequate to cover even ‘simple’ products (is there such a thing?).

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